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Computer Science & Engineering 2111

Lecture 6
Financial Functions

CSE 2111 Lecture 6-Financial Functions 1


Financial Functions
• Functions that can be used to calculate values
based on compounded interest
– Taking a loan
– Investing in a savings account

CSE 2111 Lecture 6-Financial Functions 2


Simple Interest vs. Compound Interest
• Simple interest always calculates interest based on the
original amount.
So $1,000 at 4% per year for 2 years
• Year 1: $1000 * 4%  $40 in interest for the 1st year.
• Year 2: $1000 * 4%  $40 in interest for the 2nd year.

After 2 years you would have:


$1,000 * 4% = $80 interest
For a total of $1,080

CSE 2111 Lecture 6-Financial Functions 3


Simple Interest vs. Compound Interest
• Compound interest always calculates interest based on the
“latest amount”.
So $1,000 at 4% per year for 2 years compounded Yearly
• Year 1: $1,000 * 4%  $40 in interest for the 1st year.
• Year 2: $1,040 * 4%  $41.60 in interest for the 2nd year.
After 2 years you would have: Simple Vs. Compound Interest
$1,000 after 2 Years at 4%
$1,000 * 4% = $81.60 interest
For a total of $1,081.60 $82.00
$81.50
$81.00
$80.50
$80.00
$79.50
$79.00

Simple Interest
Compound Interest

CSE 2111 Lecture 6-Financial Functions 4


Compounding Periods
• Compounded Yearly
• Compounded Quarterly
• Compounded Semi-Annually
• Compounded Monthly
• The total amount of your financial transaction
will be different based on when the interest is
compounded.

CSE 2111 Lecture 6-Financial Functions 5


Compounding Interest Quarterly
What if we compound our 4% interest quarterly for the $1,000.
This would be four separate calculations

Quarter Principal Interest


1st Quarter $1,000 * 1% = $10.00
2nd Quarter $1,010 * 1% = $10.10
3rd Quarter $1,020.10 * 1% = $10.201
4th Quarter $1,030.301 * 1% ≈ $10.30

CSE 2111 Lecture 6-Financial Functions 6


CSE 2111 Lecture 6-Financial Functions 7
Financial Functions
• Present Value (PV)
– What you get/pay at the beginning of the financial transaction

• Future Value (FV)


– What you are going to get OR what you will have to pay at the end
of the financial transaction

• Payment (PMT)
– Payment made each period. It remains constant over life of annuity
• RATE
– Interest rate per period
• NPER
– Number of payment periods

CSE 2111 Lecture 6-Financial Functions 8


Financial Functions-Syntax
=PV(rate, nper, pmt, [fv], [type])

=FV(rate, nper, pmt, [pv], [type])

=PMT(rate, nper, pv, [fv], [type])

=RATE(nper, pmt, pv, [fv], [type], [guess])*Compounding Periods

=NPER(rate, pmt, pv, [fv], [type]) / Compounding Periods

CSE 2111 Lecture 6-Financial Functions 9


Arguments in Financial Functions
Argument Description Argument Rules
rate Interest rate per Always divide the rate by the number of
compounding period compounding periods
Rate/ # of compounding periods
nper Number of Always multiply the number of years by the
compounding periods compounding period
# of compounding periods * # of years
pmt Periodic payments to Payment amount cannot vary
the initial sum
pv Original value of
financial transaction
fv Value at the end of
the financial
transaction
type Designates when 0: Payments are made at the end of the period
payments are made 1: Payments are made at the beginning of the period
(0 is the default and is implied)

CSE 2111 Lecture 6-Financial Functions 10


Using Financial Functions Arguments
• Use consistent signs
– Outgoing cash ( - )
– Incoming cash ( + )
• For arguments that are zero, at least a comma must be put
in the function to maintain the argument order, unless no
other non-zero arguments follow.
=PV(.03, 2, 0, 5000, 0)
same as
=PV(.03, 2, , 5000)

CSE 2111 Lecture 6-Financial Functions 11


Write an excel formula in cell D2 to calculate the payment for a loan
amount of $15,000 at 9% interest rate for a period of 5 years.
Assume the loan is compounded monthly.
=PMT(rate, nper, pv, [fv], [type]) ----Returns periodic payment

=PMT(.09/12,5*12,15000,0,0) OR =PMT(.09/12,5*12,15000)

CSE 2111 Lecture 6-Financial Functions 12


Write an excel formula in cell B2 to determine how many years it
will take to save $12,000 if you put $10,000 into a savings account
paying 4% annual interest compounded quarterly.
=NPER(rate, pmt, pv, [fv], [type]) ----Returns # of Payment periods

=NPER(.04/4,0,-10000,12000,0) /4 OR =NPER(.04/4,,-10000,12000)/4

Note: Divide the function by the number of compounding


periods to calculate the number of years for the annuity

CSE 2111 Lecture 6-Financial Functions 13


Write an excel formula in cell A2 to calculate the annual interest rate of a
new Chevy Cruz. The cost of the car is $18,999, and you will put down
$2,000. You will pay $350 per month for five years. The annual interest
rate is compounded monthly.
=RATE(nper, pmt, pv, [fv], [type]) ----Returns the rate per period

=RATE(5*12,-350,16999,0,0)*12 OR =RATE(5*12,-350,16999)*12

Note: Multiply the function by the number of compounding


periods to calculate the annual interest rate

CSE 2111 Lecture 6-Financial Functions 14


Write an excel formula in cell E2 to determine how much money you
would have to put into a CD now to have a $5,000 down payment on a car
when you graduate in 2 years. The CD pays 3% annual interest rate
compounded yearly.
=PV(rate, nper, pmt, [fv], [type]) - Returns the present value of an investment

=PV(.03,2,0,5000,0) OR =PV(.03,2,,5000)

CSE 2111 Lecture 6-Financial Functions 15


Write an excel formula in cell F2 to determine the value of a CD in 2 years.
You plan on an initial investment of $5,000 and you will add an additional $50
per month. The CD pays an annual interest rate of 3% compounded monthly.

=FV(rate, nper, pmt, [pv], [type]) - Returns the future value of an investment

=FV(.03/12,2*12,-50,-5000,0) OR =FV(.03/12,2*12,-50,-5000)

CSE 2111 Lecture 6-Financial Functions 16


Write an Excel formula in cell G2 to calculate the monthly mortgage payment for a
$100,000 home with a balloon payment of $10,000. The annual interest rate is 4%
compounded monthly with a loan duration of 30 years. Note: A balloon payment is an
amount due at the end of the loan and is indicated in the fv argument as a negative value
.

CSE 2111 Lecture 6-Financial Functions 17


Five years ago you won $75,000 on the game show, “I Wanna Win A lot of
Money”! At that time, you invested the money in a CD that paid 6% per year
compounded monthly. Write a formula in cell C9, to determine T/F if you have
enough money to purchase a $100,000 house without financing.

CSE 2111 Lecture 6-Financial Functions 18